Windows 2000, trial concerns hit Microsoft stock

That's a question on many analysts' lips these days, as the software giant's stock hovers around the $90 mark. After hitting a 52-week high in December, Microsoft shares have skidded this year in contrast to the gains from competitors such as Oracle and Apple.

Although the exact cause of the slide is difficult to pin down, an impending judgment or settlement in the federal antitrust case is causing jitters, analysts said, while some concerns persist about the adoption rate of Windows 2000, the company's new operating system for businesses.

"The stock has gone nowhere for the past few months," said Andrew Roskill, an analyst at Warburg Dillion Read, who nonetheless rates the stock a "buy."

Still, the slide comes amid a relatively glitch-free release of Windows 2000 on Feb. 15, and PC sales appear to be on track for the first quarter of this year--two factors that would logically support a continued rise for Redmond, Wash.-based Microsoft.

The stock closed down $2.19 yesterday at $89.38, significantly off its 52-week high of $119.93 set in December. At 1 p.m. PST today, the close of regular trading, Microsoft was up about 2 percent to $90.81.

"The trial has been an overwhelming damper on Microsoft's stock performance," said J.P. Morgan analyst Bill Epifanio. "I think it will continue to affect the stock until either a settlement comes around or investors understand that there's going to be an appeal--and (the issue) will take a long time (to be resolved)."

Microsoft, for one, did not shed any light on the subject. "We never comment on our stock performance," said Microsoft spokesman Tom Pilla. "We never have, and we never will."

For investors, uncertainty about what will occur next is perhaps a bigger problem than what actually may happen. A long, appeals-ridden solution to the landmark trial could be more favorable to investors, as it will give them time to weigh their options.

But at the same time, an 11th-hour settlement--which conceivably could include a breakup of the company--would give investors a clearer idea of the future. Settlement talks are under way in Chicago, although no real progress has been reported.

Also odd is that the release of Microsoft's latest OS, Windows 2000, has not reversed the company's stock slide. Many analysts view the software favorably and believe it will become a fixture in the computing world. Still, the challenges of introducing a new product may initially offset any significant gains in the short term.

"It's not a quick sale," said Advest analyst Aaron Scott. "It's a corporate product, so you won't see (significant) sales impact until later in the calendar year." Scott believes that Windows 2000 sales will start to pick up around June, after the first "service pack," or collection of bug fixes, comes out.

Scott also believes the OS has received negative press coverage, which may have dampened some enthusiasm.

"The product is out, but the negative view on it is that there are some bugs," he said. "It's perfectly natural to have some bugs, but the press has been hitting the company pretty hard."

Industry consensus is that the upgrade cycle for Windows 2000 will be a multiyear process. In a recent report, Merrill Lynch's Steve Milunovich surveyed chief information officers from 70 companies, revealing how fast many corporations will switch.

When asked, "Will you upgrade your PCs to Windows 2000 in the next year?" 65 percent of respondents said "No," compared with 35 percent answering affirmatively. The numbers were similar for server computers.

Up against e-commerce
Another challenge that Microsoft may face lies in corporate America's enthusiasm for e-commerce. In short, businesses may choose to purchase e-commerce or other Web-presence software and put the Windows 2000 upgrades on the back burner.

"The biggest challenge Windows 2000 faces right now is not another competitor's operating system--it's other business applications," said J.P. Morgan's Epifanio.

PC sales are another looming question mark. Although lower-than-expected earnings results from Gateway and Dell Computer recently indicated declining sales, the number of PCs rolling out of factories seems to be on track.

PC sales are off from the fourth quarter because of typical seasonal weakness, according to Anne Bui, an analyst for International Data Corp. (IDC). But they appear to be up compared with sales for the first quarter of 1999. IDC predicts 12.2 million unit sales in the United States for the first quarter of 2000 compared with 9.9 million in the year-ago period, a 23 percent jump.

The forecasts were computed three months ago, and the company plans to release update figures soon.

Another consideration is the way in which Microsoft's institutional investors have been reacting. Could the people with larger stakes in the company be dumping the stock?

"That's probably a good guess, but it's hard to say," said Advest's Scott. "But I don't think you're seeing 100-share (investors) running."

Epifanio remains confident about the company and its products. "Windows 2000 is the strongest OS Microsoft has ever produced," he said. "I would say investors should hold onto the stock."

Added Roskill, of Warburg Dillon Read: "I think we've seen a lot of that (institutional adjustment) over the last six months. Portfolio investment strategy is also changing. In 1999, if you owned the large-cap tech gorillas, you'd win. In 2000, people are becoming more focused in their strategy."